chapter 15 job order costing & analysis. cost accounting systems determine the costs associated...

CHAPTER 15

Job Order Costing & Analysis

Cost Accounting Systems

determine the costs associated with products (or services).

• ________ Cost System (this chapter)–used for unique or custom ordered

products• ________ Cost System (next

chapter)– is used for mass produced items

Job-Order Costing• ____ or job lots are used as the

means of collecting costs.–Used for production of large, unique,

or high-cost items.

– Built to order rather than mass produced.

– Many costs can be directly traced to each job

– Jobs are easily distinguished from one another

• Examples: professional services, printing, construction, custom furniture, jumbo jet airplanes, hospitals, law firms…

Events in Job Costing

Receive order from customers

Predict cost to

complete job

Negotiate a sales price and decide

whether to pursue the job.

Schedule the job

Uses of Cost Information

• We can use the job costs to help with the following types of activities.– pricing the job– controlling cost– budgeting

Job Order Cost Flows

• You must understand the ____ of costs through the accounting system

• Remember the elements of cost of products from the previous chapter

• You can use T-Accounts and/or journal entries to understand the flow.

Cost Flows in Job Costing

Goods in

ProcessCost of GoodsSold

Labor

Materials

Ind

irect

Ind

irect

FinishedGoodsFactory

Overhead

Direct

Direct

Allocate

Factory (direct) Labor• This account is used to account for all

wages paid to workers within the _______.

• We debit Factory Labor as labor costs are incurred and recognized – What’s the credit?

• We determine what portion of this is ______ labor and which represents ______ labor– Direct labor goes into ______________

• Why?– Indirect labor goes into ____________

• Why?

Factory Overhead (OH)

• We use the ________ account for two reasons:

• We debit it as the overhead items are incurred and recognized in the accounting system.

• We credit it as we apply (______) overhead to individual jobs– WIP $X– OH $X

Applying OH to Jobs

• How do we know how much overhead to apply to the various jobs in process?

• We determine an application base and a rate to use in applying the OH.

• ? = ?_____________ (POHR) ?

• where the activity level is usually some measure of direct labor hours, direct labor cost or machine hours (i.e. the ________)

Under or Over Applied Overhead

• _____________ = OH rate * actual activity (POHR) for the period

• At the end of the year, the OH account may have a debit or a credit balance– amount incurred during the year did not

equal the amount applied to individual jobs

– In other words, our estimates aren’t perfect!

• We will close out this account at the end of the year to _____.

Why allocate OH instead of using actual?

• Reasons for using a predetermined OH rate– Overhead is not incurred _______

throughout the year– Actual overhead rate might _____ from

month to month– Predetermined rates make estimating job

costs ________– Actual overhead is _______ until after it has

been incurred (i.e. at the end of the year)

Predetermined Factory Overhead Rates

Activity base examples

Estimated totalfactory overhead costs

Estimated activity base

Predeterminedfactory overhead rate

=

1. Direct labor hours 2. Direct labor dollars 3. Machine hours 4. Direct materials 5. Other

Predetermined Factory Overhead Rates

Estimated totalfactory overhead costs

Estimated activity basePredetermined

factory overhead rate=

$50,000 estimatedfactory overhead costs

10,000 estimateddirect labor hours

=$5 per directlabor hour

Predetermined Factory Overhead Rates

Estimated totalfactory overhead costs

Estimated activity basePredetermined

factory overhead rate=

$50,000 estimatedfactory overhead costs

10,000 estimateddirect labor hours

=$5 per directlabor hour

For each direct labor hour worked, factory overhead applied is $5.

Job 71 350 x $5 = $1,750Job 72 500 x $5 = $2,500

Direct FactoryLabor OverheadHours Applied

Recording Factory Overhead

Factory Overhead

ACTUALBased on

actual costs incurred

ACTUALBased on

actual costs incurred

$4,400

Recording Factory Overhead

Factory Overhead

ACTUALBased on

actual costs incurred

ACTUALBased on

actual costs incurred

$4,400

APPLIEDBased on

estimated rate($5 x 850 hrs)

APPLIEDBased on

estimated rate($5 x 850 hrs)

$4,250

What account is charged

(debited)?

What account is charged

(debited)?

Is factory overhead overapplied or underapplied?

Is factory overhead overapplied or underapplied?

Recording Factory Overhead

Factory Overhead

ACTUALBased on

actual costs incurred

ACTUALBased on

actual costs incurred

$4,400

APPLIEDBased on

estimated rate($5 x 850 hrs)

APPLIEDBased on

estimated rate($5 x 850 hrs)

$4,250

BALANCEUnderapplied

BALANCEUnderapplied

$150

Work in Process is charged

(debited).

How would this balance be closed at year end?

How would this balance be closed at year end?

Recording Factory Overhead

Factory Overhead

ACTUALBased on

actual costs incurred

ACTUALBased on

actual costs incurred

$4,400

APPLIEDBased on

estimated rate($5 x 850 hrs)

APPLIEDBased on

estimated rate($5 x 850 hrs)

$4,250

BALANCEUnderapplied

BALANCEUnderapplied

$150

An immaterial balance is closed to Cost of Goods Sold at year end.

An immaterial balance is closed to Cost of Goods Sold at year end.

Work in Process is charged

(debited).

Job Cost Sheets

• A __________ is prepared for each and every job undertaken. The job sheet is used to keep track of all the costs applied to that job– direct materials, direct labor, OH

• When a job is complete, we – decrease ___ inventory and – increase __ inventory by the cost of the job

that is done. • When jobs are sold, we transfer the

costs to ____

Purpose of Job Cost Information and Sheets

• Job Cost sheets are maintained to aid in the following:–Tracking the cost of ____________–Transferring costs from ___ to __ to

____–Serving as a subsidiary ledger of

information for WIP and FG.• Any time you make an entry to

WIP, then you should also enter information on the related job cost tickets.

Reporting of Cost Data

• The balance sheet will contain the _____ _______ of the various inventory accounts.

• The income statement will show the COGM and the COGS as described in the previous chapter, with one exception.

COGM = WIP, beg + (DM used + DL + actual OH) + overapplied overhead (or – underapplied overhead) - WIP, end.

Cost of Good Sold

• ____________is still equal to:

FG inventory, beg+ COGM= Goods Available for Sale- FG inventory, end= Cost of Goods Sold

Review the Flow of Costs

• 1. Purchase raw materials• 2. Incur factory wages • 3. Incur overhead• 4. Raw materials used• 5. Factor labor is applied to jobs• 6. Overhead is applied to jobs• 7. Completed jobs are recognized• 8. Cost of goods sold is recognized.

Raw Materials

MaterialPurchase

s

DirectMateria

l

DirectMaterial

Goods in Process

Factory Overhead

ActualOverhea

dCosts

Indirect

Material

P3

Summary of Cost Flows

Dr Cr

Dr Cr Dr Cr

Incurred DirectMaterial

Actual Applied factory factoryoverhead overhead

=/

an adjustment is needed.

When

Goods in ProcessFactory Payroll

Factory Overhead

DirectLabor

DirectLabor

Indirect

Labor

ActualOverhea

dCosts

Overhead

Overhead

Applied to Work

inProcess

P4

Summary of Cost Flows

DirectMaterialDirectLabor

Overhead

Cost of

GoodsMfd.

Cost of

GoodsMfd.

Cost of

GoodsSold

Cost of

GoodsSold

Goods in Process Finished Goods

Cost of Goods Sold

P4

Summary of Cost Flows